Magazine article The National Public Accountant

Installment/lump-Sum Benefits Election

Magazine article The National Public Accountant

Installment/lump-Sum Benefits Election

Article excerpt

Installment/Lump-Sum Benefits Election

In a recent case of first impression, the Tax Court has determined that employees did not "constructively receive" shadow stock benefits either at the time a lump-sum option became available or at the time they elected to receive installments.

The constructive receipt doctrine holds that a cash basis taxpayer cannot postpone the reporting of gross income by failure to exercise his or her unrestricted right to collect it (IRS Regulations 1.451-2(a)). However, income is not constructively received if the taxpayer's control is subject to "substantial limitations or restrictions."

In the 1960s, the taxpayers' company established a management profit sharing plan in which key employees received profit sharing units. In 1981, the company adopted a new shadow stock deferred benefits plan. (Shadow stock is used as a measure of deferred compensation plan obligations but is not actually purchased or sold.) Employees electing this new plan surrendered their old plan units in exchange for the new shadow stock. Under the new plan, employees were to receive their payment in a lump-sum unless they elected to receive it in 10 annual installments.

This election was required to be made prior to employment termination. In the same year in which the new plan was adopted, the taxpayers either retired or were forced to leave the company. …

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